When is a holiday home a solid investment? Here’s what you need to consider when purchasing a piece of paradise. A holiday home provides a calm respite from the hustle and bustle of city life. Apart from the leisure advantages, it could be a solid investment. But how do you make sure your holiday pad provides healthy returns over the long term? Consider the following practical pointers:
A future-focused approach
While shopping around for a holiday home, research the area’s property appreciation over the past year. Also, look at how well the area is maintained, as well as crime rates.
“Do your homework and make sure you’re aware of developments in the area that may impact on future value,” advises Lynette Moodley, digital brand manager SA Home Loans.
Location, location, location
According to HomeAway, which provides a global online vacation rental marketplace, an astonishing 89% of newly purchased holiday homes are being rented out within the first year. How do you ensure that you fall into this bracket?
Moodley suggests the following. “If you’re planning on letting this house as an investment, are you likely to get high occupancy rates by holidaymakers in that area? Or will it only be in demand during holiday periods – and is that going to be enough to cover your costs?”
The bonds that tie
If you’re a current homeowner, you’re already aware of the costs involved in owning property and the process required in getting a home loan.
“With second homes, you’ll need to be able to prove you can afford any new bond you require, so your primary bond needs to be almost paid up or you’ll need to have the income to cover two bonds,” says Moodley.
Consider your current financial position. Remember, buying any property could cause financial strain. All the more when it comes to a second (or third) property.
Bear in mind that acquisition costs are accompanied by a deposit, transfer fees and conveyance fees. Also, think about interest rate hikes, rates and taxes and maintenance.
Moodley advises: “Don’t rely 100% on rental income to cover your expenses. Are you able to cover costs like rates and levies in addition to the bond repayments if you don’t find long- or short-term tenants?”
There are practicality issues to consider regarding holiday homes. A property management company will help take care of your investment and place tenants.
To list or not to list
In addition to traditional short-term rental options, listing your property on Airbnb or similar platforms is a great way to earn extra money – provided you do your homework and get the basics right. According to Bruce Swain of the Leapfrog Property Group, you must go about it in an open-minded way and pay attention to the regulations that apply.
“Currently, South African cities don’t have Airbnb-specific by-laws like cities such as Berlin and Paris, but it’s still advisable to contact the relevant bodies to ensure it’s above board,” advises Swain.
“Remember that income earned is income taxed,” says Swain. If you intend to rent out your holiday home or list it on Airbnb, you’re legally required to declare those earnings as part of your income. “Ask your accountant or tax adviser about the most efficient way to declare Airbnb income and pay the associated tax,” he advises.
Supply and demand
When it comes to any type of investment, the current local economic climate plays a key role. To set the scene:
The FNB Holiday Towns House Price Index showed that house price growth in so-called holiday towns slightly exceeded the national average house price growth rate during the first quarter of 2018.
However, there is no doubt that consumers are taking strain at the moment. “Businesses are struggling and the economic outlook isn’t great,” says Johette Smuts, head of data and analytics at PayProp South Africa.
“For 2019, economists expect inflation to continue to rise for most of the year while economic growth is likely to stay slow, meaning consumers won’t get a break from their woes for at least the next year,” says Smuts.
Let’s go on holiday… or not
Ask yourself: Does the cost of owning and maintaining a holiday home justify its purpose? While a leisurely holiday destination on demand might seem like a dream, make sure it doesn’t stretch your budget too far.